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Yesterday’s potential groundbreaking European Central Bank policy meeting produced a massive rally by high beta currencies and risk-correlated asset; however, there’s been little continuation of this move today. The US Dollar has emerged as the top performer thus far through Friday, as investors take profits and reconsider positioning as various major currencies hover near pivotal levels ahead of next week.

There are two main focuses in FX right now: will the Japanese Yen onslaught continue; and whether or not the Euro is at a fundamental turning point. With respect to the first point, Japanese Prime Minister Shinzo Abe has stepped up his rhetoric for the Bank of Japan to implement a +2.0% yearly inflation target, meaning that speculation about potential policy changes will continue to run high until the January 22 policy meeting. As the meeting approaches, however, it is worth pointing out that the Japanese Yen is simply a very oversold currency. In fact, according to the CTFC’s COT report, net non-commercial futures positioning is at its shortest level since July 2007; the short trade is very crowded. A look at the weekly chart shows that the USDJPY hasn’t posted a negative period since the first week of November. In fact, last week’s RSI was above 80 – the last time that happened was in December 2005, which produced a pullback of >500-pips. Accordingly: seeing the Japanese Yen bottom (xxxJPY pairs top) after the BoJ would not be surprising; the conditions are ripe for a significant turnaround.

In terms of the Euro, the shift in rhetoric by ECB President Mario Draghi from ‘this is a financial crisis’ to now ‘this is an economic-growth crisis’ signals what could be a shift in policy making. Indeed, with no governments requesting a rate cut, a period of calm has descended on Europe. With the US budget negotiations set to reenter the conversation in a few weeks, the Euro could be setting up for a solid 1Q’14.

Taking a look at European credit, there’s only been slight follow through after yesterday’s strong performance, which could be constraining the Euro. The Italian 2-year note yield has increased to 1.332% (+0.7-bps) while the Spanish 2-year note yield has increased to 2.055% (+4.3-bps). On the contrary, the Italian 10-year note yield has decreased to 4.129% (-1.9-bps) while the Spanish 10-year note yield has decreased to 4.859% (-1.2-bps); lower yields imply higher prices.

EURUSD: The bullish RSI divergence noted at the beginning of the week finally produced a rally, on the back of a more hawkish ECB than previously expected. Likewise, the RSI downtrend on the daily chart has been broken, despite price holding below the May/December highs at 1.3280/3310. Coincidentally, focus is on buying dips. Support comes in 1.3120/45, 1.3045/50 (50-EMA), and 1.3000 (weekly low). Resistance is 1.3280/3310 and 1.3380/85 (mid-March swing high).

USDJPY: The pair’s rally has continued to its highest level since June 2010, essentially leaving the door open for a run above 90.00. As noted previously, “Given BoJ policy, any dips seen in the USDJPY are viewed as constructive for further bullish price action,” though I would like to clarify that this view is only valid until the BoJ meeting on January 22; the market remains very net-short the JPY, so a near-term top marked by an event seems possible (think the US Dollar bottoming the day after QE3 was announced). Resistance comes at 89.10/35 (daily high, weekly R1) and 90.10/15 (monthly R2). Support comes in at 88.40 (monthly R1) and 87.00/40 (weekly pivot).

GBPUSD: No change: “The pair has fallen back from 1.6300, again, though with no follow through yet, my levels remain the same (they haven’t changed since early-December). However, the pair is now coming into ascending TL support off of the July and November lows at 1.5985. Support is there and 1.5895 (200-DMA). Resistance comes in at 1.6085/90 (50-EMA), 1.6180, and 1.6300/10 (post-QE3 announcement high in mid-September).”

AUDUSD:The pair has broken the December highs and a break signals a push towards 1.0605/25. However, it’s worth noting that the daily RSI hasn’t pushed into overbought territory on any rally since February 2012. Accordingly, we’ll either see a move to new highs and with RSI confirming the breakout; or further consolidation/pullback is in order before the next leg higher. Support is at 1.0530/50 (weekly R1, monthly R1), 1.0435/60 (weekly and monthly pivot), and 1.0340/50. Resistance is 1.0530/85 and 1.0605/25 (August and September highs).

S&P 500: No change: “The S&P 500is back above a very significant zone of 1445/50 (descending trendline off of September and October highs, 100% Fibonacci extension off of the November 16 low, the November 23 high, and the November 28 low extension), and a move higher necessarily points to 1470/75. Support comes in at 1425, 1400, 1390 (200-DMA) and 1345/50 (November low).”

GOLD: No change: “Gold is at a make or break level right now, former Symmetrical Triangle support at 1630/40, and its lowest level since August, before the ECB and the Fed’s QE intervention hopes took hold. Additionally, when considering the move off of the September highs, a measured A-B=C-D (as expressed on the Daily) suggests that a bottom could be in place at these levels as well. Support is there at 1580. Resistance is 1690/95, 1735, 1755, and 1785/1805.”

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